1. The More Things Change the Less We Get Paid Medicare Hospital Reimbursement Update 2013 Spring Conference May 17, 2013

2. Medicare Hospital Reimbursement Update Recent and potential future legislative actions FY 2014 IPPS Proposed Rule: –Medicare DSH Revisions –Everything else 2

3. 3 Recent and Potential Future Legislative Actions

4. Medicare Hospital Reimbursement Update American Taxpayer Relief Act of 2012 (aka the Fiscal Cliff deal) –“Doc fix” to the Medicare physician fee schedule until 1/1/14 –Hospitals helped pay for the “doc fix” CMS to reduce inpatient PPS payments by a total of $11+ billion during FY 2014 - 2017 –Intended to recoup alleged overpayments related to MS- DRGs from FY 2008-2013 Additional $4+ billion in cuts to Medicaid DSH on top of cuts already coming from PPACA 4

5. Medicare Hospital Reimbursement Update ATRA (cont.) –Some relief for certain rural hospitals Hospital low-volume payment adjustment provisions extended one year through 9/30/13 Medicare Dependent Hospital (MDH) status extended through 9/30/13 –Certain previous MDHs must re-apply »Hospitals that elected Sole Community Hospital (SCH) status »Hospitals that gave up rural status –All other previous MDHs automatically reinstated retroactive to 10/1/12 5

6. Medicare Hospital Reimbursement Update ATRA (cont.) –Some relief for certain rural hospitals MDH and low-volume payments retroactive to 10/1/12 –Contractors were able to begin reprocessing on 4/1/13 –CMS has instructed contractors to have all retroactive claims reprocessed by 6/30/13 6

7. Medicare Hospital Reimbursement Update ATRA (cont.) –Unfortunately OPPS hold-harmless transitional outpatient payments (TOPS) were not extended Expired 12/31/12 for rural hospitals with < 100 beds Expired 2/29/12 for Sole Community Hospitals (SCH) 7

8. Medicare Hospital Reimbursement Update Sequestration –Officially began 3/1/13, but not applicable to Medicare until 4/1/13 –2% cuts to Medicare Applied to only the remaining Medicare payment after coinsurance, deductibles, MSP payments –Example$100 total payment, including $20 coinsurance 2% x ($100-$20) = $1.60 cut, not $2.00 Being applied to interim pass-through payments Medicare EHR incentive payments are subject to 2% cut: This 2% reduction will be applied to any Medicare EHR incentive payment for a reporting period that ends on or after April 1, 2013. If the final day of the reporting period occurs before April 1, 2013, those incentive payments will not be subject to the reduction. 8

9. Medicare Hospital Reimbursement Update Sequestration (cont.) –Projected Medicare cuts of ~$10 billion for remainder of 2013, with close to half specifically related to hospitals –Sequestration less painful compared to cuts Congress might implement in a spending reduction bill? $400+ billion over 10 years? More Medicare bad debt reductions? GME payment reductions? Reduction or elimination of special designations such as CAH, MDH, SCH, etc? 9

10. Medicare Hospital Reimbursement Update Future of MDH –In late April Senators Schumer (D-NY) and Grassley (R-IA) and Representatives Reed (R-NY) and Welch (D-VT) introduced legislation to extend MDH through September 30, 2014 Further action may not come for several months depending on other legislation 10

11. Medicare Hospital Reimbursement Update PPACA Medicaid DSH Reductions –PPACA “requires aggregate reductions to state Medicaid Disproportionate Share Hospital (DSH) allotments annually from fiscal year (FY) 2014 through FY 2020.” –On May 13 CMS issued proposed rule to implement $1.1 billion in cuts for FY 14 and 15 –Proposed cut for WV – 4.34% –Proposed overall cut for “Regular DSH States” – 4.42% 33 states including WV, plus DC –Proposed overall cut to “Low DSH States” – 1.20% 17 states –National average – 4.28% 11

12. 12 FY 2014 IPPS Proposed Rule – Medicare DSH Revisions

13. Medicare DSH Background Enacted by statute in 1986. Purpose is to provide additional reimbursement for hospitals that serve a disproportionate share of low income patients. Low income patients tend to have more health issues and do less health maintenance and thus increase the amount of resources required to serve their health needs. Medicare DSH reimbursement has increased significantly over the last ten years. 13

14. Medicare DSH Reimbursement FY 2000 5.18 FY 2001 5.68 FY 2002 6.63 FY 2003 7.10 FY 2004 7.82 FY 2005 9.00 FY 2006 9.18 FY 2007 9.40 FY 2008 10.12 FY 2009 10.42 FY 2010 10.83 FY 2011 11.59 FY 2012 11.93 14 Total federal spending: ($ billions) Source: CMS, Office of the Actuary

15. Medicare DSH Reimbursement FY 2003: 63% FY 2004: 67% FY 2005: 71% FY 2006: 73% FY 2007: 75% FY 2008: 75% FY 2009: 77% FY 2010: 76% FY 2011: 78% FY 2012: 78% 15 Percentage of Inpatient Hospitals that Qualify for Medicare DSH Source: CMS, Office of the Actuary

16. Medicare DSH Reimbursement The DSH add-on is based on the sum of two fractions: (1) Medicare / SSI Fraction Days for patients entitled to Medicare Part A and entitled to SSI benefits Divided By Days for patients entitled to Medicare Part A (2) Medicaid Fraction: Days for patients eligible for Medicaid and not entitled to Medicare Part A Divided By Days for patients in acute care areas (including nursery) 16

17. Medicare DSH “New” Methodology Section 3133 of PPACA requires significant revisions to Medicare DSH Effective FY 2014 (beginning October 1, 2013) – only a few months away! FY 14 IPPS proposed rule published on April 26, 2013 was the first guidance provided by CMS. 17

18. Medicare DSH “New” Methodology The “new” Medicare DSH will have two components: –Part one will be 25% of the amount determined using the current payment calculation. –Part two will be an allocation of a pool of funds: The pool will be based on the remaining 75% Each hospital’s share of the pool will be based on the hospital’s uncompensated care as a percentage of total uncompensated care for all hospitals sharing the pool. 18

19. Medicare DSH Proposed Rule FFY 2014 UCC portion of funds to be allocated based on 75% of what would have been paid for DSH for FFY 2014 under old rule less estimated reduction in uninsured less statutory reduction. Source used for estimated DSH payments for 2014 under old rule – Office of Actuary. 19

20. DSH Payment under old rule = $12.34B, 75% = $9.25B Uninsured percentages based on CBO estimates. Uninsured for 2013 published in 2010 = 18%, estimate for 2014 published in Feb 2013 = 16%. 1-[(.16-.18)/.18] = 1 -.111 =.889 less statutory reduction.001 =.888. $9.2535B x.888 = $8.217B 20 Medicare DSH Proposed Rule FFY 2014

21. Total DSH funds for allocation of UCC = $8.217B How will these funds be allocated? –Months of speculation in the industry –Most believed the source would be cost report Worksheet S-10 CMS proposes use of a proxy to estimate UCC - Medicaid days plus Medicare SSI days 21 Medicare DSH Proposed Rule FFY 2014

22. Why was S-10 not used as the source? Proposed rule discusses in some length –S-10 is “a new data source” and has been “used for specific payment purposes only in relatively restricted ways” (EHR) –S-10 has not been subject to audit other than related to EHR –CMS believes that when information requested drives payment, it is more likely to be accurate –CMS uses wage index as example that information must be audited to be used for payment purposes –Hospitals expressed concern that they have not had enough time to learn how to submit accurate and consistent data on Worksheet S-10 22 Medicare DSH Proposed Rule FFY 2014

23. Why was S-10 not used as the source? (cont.) –S-10 instructions still require clarification to ensure consistency. –May propose to use S-10 in the future “once hospitals are submitting accurate and consistent data” –Medicaid days have been the driver of the DSH payment since the inception of the DSH regulation. They have also been subject to audit –Many providers contacted CMS to voice concerns over issues with using S-10 –CMS requests comments on the proposed rule related to S-10 23 Medicare DSH Proposed Rule FFY 2014

24. Source of UCC portion –Same rules apply for counting Medicaid days –Source for Medicaid days – “most recent available filed cost report” Appears to be based on cost report period beginning in FFY 2011 for most providers –Source for Medicare SSI days – “most recent available SSI ratios” Currently the most recent SSI is 2010 but CMS expects to update to 2011 in final rule 24 Medicare DSH Proposed Rule FFY 2014

25. Table published that includes Medicaid and Medicare SSI days and hospital percentages for allocation –Available online at http://www.cms.gov/Medicare/Medicare-Fee- for-Service-Payment/AcuteInpatientPPS/dsh.htmlhttp://www.cms.gov/Medicare/Medicare-Fee- for-Service-Payment/AcuteInpatientPPS/dsh.html –If amended cost report was processed by MAC, those appear to be included. If additional Medicaid days submitted for audit, those are not included in table because final settlement is not complete 25 Medicare DSH Proposed Rule FFY 2014

26. Hospitals have 60 days from Proposed rule to notify CMS of change in subsection (d) status No change can be made to Medicaid days ACA prescribes that the estimates used by the Secretary are not subject to judicial review –Estimates include the factors used as well as the time period used 26 Medicare DSH Proposed Rule FFY 2014

27. What will be the timing of payment determination? –Prospectively paid on federal fiscal year regardless of hospital year Paid on an interim rate and subject to cost report settlement? –No cost settlement except potentially for SCH Will all hospitals be allowed to share in the 75% pool or just those also eligible for the 25% payment? –Only those eligible for any DSH payment, providers still must reach the 15% threshold to receive any DSH 27 Medicare DSH Proposed Rule FFY 2014

28. How will the 12% cap currently applicable for many rural and certain urban hospitals be applied? –Cap is not addressed in the proposed rule at all –Calculated payment using CMS table results in total DSH payment above 12% for certain capped hospitals we have assessed 28 Medicare DSH Proposed Rule FFY 2014

29. SCH – whether or not they will participate in the interim DSH pool will be estimated –If the estimate is incorrect, adjustment will be made at cost report settlement –SCH reimbursement – Greater of HSP or Federal + 25% DSH portion - the 75% is not to be included in comparison. –SCHs should check their status on the table 29 Medicare DSH Proposed Rule FFY 2014

30. No redistribution per proposed rule! If SCH received allocation and should not have, no retroactive change to other hospital percentages Reason provided in proposed rule – this is “inherent use of estimates”. (CMS) “does not know of any reason to believe there will be a bias toward systematic overpayment or underpayment.” 30 Medicare DSH Proposed Rule FFY 2014

31. UCC Percentage – Top 15 Hospitals 31 FY 2014 IPPS Proposed Rule: Implementation of Section 3133 of the Affordable Care Act - Medicare DSH - Supplemental Data PROVNAME Proposed Medicaid Days Proposed Medicare SSI Days Proposed Insured Low Income Days Proposed Factor 3 Projected to Receive DSH for FY 2014 330059MONTEFIORE MEDICAL CENTER185096417782268740.632298%Y 100022JACKSON HEALTH SYSTEM195957220702180270.607642%Y 330101NEW YORK-PRESBYTERIAN HOSPITAL168017395372075540.578453%Y 100006ORLANDO REGIONAL HEALTHCARE138508118741503820.419115%Y 450015PARKLAND HEALTH AND HOSPITAL SYSTEM13756049931425530.397295%Y 150056CLARIAN HEALTH PARTNERS INC D/B/A METHODIST IU RIL12777894671372450.382502%Y 100007FLORIDA HOSPITAL114674217871364610.380317%Y 180088NORTON HOSPITALS, INC107995101951181900.329396%Y 330169BETH ISRAEL MEDICAL CENTER87384307681181520.329290%Y 450388METHODIST HOSPITAL98256194821177380.328136%Y 330024MOUNT SINAI HOSPITAL88121255431136640.316782%Y 330194MAIMONIDES MEDICAL CENTER82170287921109620.309251%Y 440049METHODIST HEALTHCARE MEMPHIS HOSPITALS91065175901086550.302822%Y 330009BRONX-LEBANON HOSPITAL CENTER92214164381086520.302813%Y 450289HARRIS COUNTY HOSPITAL DISTRICT10592227201086420.302785%Y

32. Case Study Generally, winners appear to be those hospitals with high Medicaid + low Medicare. Generally, losers appear to be those hospitals with low Medicaid + high Medicare. 32

33. 33 FY 2014 IPPS Proposed Rule: Implementation of Section 3133 of the Affordable Care Act- Medicare DSH- Supplemental Data PROVNAME Proposed Medicaid Days Proposed Medicare SSI Days Proposed Insured Low Income Days Proposed Factor 3 Projected to Receive DSH for FY 2014 Pool amount per Proposed Rule 100022JACKSON HEALTH SYSTEM195957220702180270.607642%Y 49,929,907 2011 Medicare DSH Amount41,320,844 x 25% 10,330,211 UCC portion of DSH based on CMS table49,929,907 Total DSH Estimate for 201460,260,118 Total DSH for 201141,320,844 Increase18,939,274 Days Utilization – 2011 Cost Report Medicare 22% Medicaid 52% All Others 26% 100%

34. 34 FY 2014 IPPS Proposed Rule: Implementation of Section 3133 of the Affordable Care Act- Medicare DSH- Supplemental Data PROVNAME Proposed Medicaid Days Proposed Medicare SSI Days Proposed Insured Low Income Days Proposed Factor 3 Projected to Receive DSH for FY 2014 Pool amount per Proposed Rule 140124JOHN H STROGER HOSPITAL514001756531560.148146%Y12,173,144 2011 Medicare DSH Amount 5,877,328 x 25% 1,469,332 UCC portion of DSH based on CMS table12,173,144 Total DSH Estimate for 201413,642,476 Total DSH for 2011 5,877,328 Increase 7,765,148 Days Utilization – 2011 Cost Report Medicare 11% Medicaid 44% All Others 45% 100%

35. 35 FY 2014 IPPS Proposed Rule: Implementation of Section 3133 of the Affordable Care Act- Medicare DSH- Supplemental Data PROVNAME Proposed Medicaid Days Proposed Medicare SSI Days Proposed Insured Low Income Days Proposed Factor 3 Projected to Receive DSH for FY 2014 Pool amount per Proposed Rule 010092D C H REGIONAL MEDICAL CENTER28516846536981.103066%Y 8,468,941 2011 Medicare DSH Amount14,555,978 x 25% 3,638,995 UCC portion of DSH based on CMS table 8,468,941 Total DSH Estimate for 201412,107,936 Total DSH for 201114,555,978 Decrease (2,448,042) Days Utilization – 2011 Cost Report Medicare 63% Medicaid 22% All Others 15% 100%

36. Medicare DSH “New” Methodology Recommendations Verify numbers used in Proposed Rule Table. May be worth commenting on if there are systematic problems. Verify status of qualifying for DSH in Table. Include all appropriate Medicaid days in future filed cost reports. Depending on timing, amendments may not be included in the allocation. Example - we found $800,000 understatement in allocation because provider did not do Medicaid analysis before cost report was filed. 36

37. Medicare DSH “New” Methodology Recommendations Comment on the proposed rule. Comments due to CMS by June 25, 2013. Watch for final rule which should be published in August. Final rule will include comments from proposed rule and CMS responses. 37

38. 38 FY 2014 IPPS Proposed Rule – Everything Else

39. Medicare Hospital Reimbursement Update Inpatient vs Observation –CMS offers new guidance in an effort to clarify: Under our proposal, Medicare’s external review contractors would presume that hospital inpatient admissions are reasonable and necessary for beneficiaries who require more than 1 Medicare utilization day (defined by encounters crossing 2 “midnights”) in the hospital receiving medically necessary services. If a hospital is found to be abusing this 2-midnight presumption for nonmedically necessary inpatient hospital admissions and payment (in other words, the hospital is systematically delaying the provision of care to surpass the 2-midnight timeframe), CMS review contractors would disregard the 2-midnight presumption when conducting review of that hospital. 39

40. Medicare Hospital Reimbursement Update Inpatient vs Observation –CMS offers new guidance in an effort to clarify (cont.): Similarly, we would presume that hospital services spanning less than 2 midnights should have been provided on an outpatient basis, unless there is clear documentation in the medical record supporting the physician’s order and expectation that the beneficiary would require care spanning more than 2 midnights or the beneficiary is receiving a service or procedure designated by CMS as inpatient-only. 40

41. Medicare Hospital Reimbursement Update Inpatient vs Observation –CMS offers new guidance in an effort to clarify (cont.): Extensive additional discussions on admission and medical review criteria for hospitals to consider Current guidance remains in effect until if/when this new policy is finalized CMS has concluded this new guidance will result in an increase in overall inpatient activity and has proposed a.2% decrease in the FY 14 standardized amounts (both operating and capital) to offset 41

42. Medicare Hospital Reimbursement Update CMS implementing additional CCRs for developing MS- DRG relative weights –In recent years hospitals have been required to break out certain items separately on cost report: Implantable devices MRI CT scan Cardiac cath –CMS believed this would result in more accurate relative weights –Proposal to go from 15 to 19 CCRs in FY 14 to break each of these out separately 42

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46. Medicare Hospital Reimbursement Update 46 Market Basket Update2.5% Market Basket Adjustment (PPACA)-0.3% Productivity Adjustment (PPACA)-0.4% Documentation and Coding Effect (ATRA)-0.8% Admission and Medical Review Criteria-0.2% 0.8% Proposed payment update:

47. Medicare Hospital Reimbursement Update 47

48. Medicare Hospital Reimbursement Update 48

49. Medicare Hospital Reimbursement Update FY 2014 proposed wage index is based on wage data from cost reporting periods beginning in Federal Fiscal Year 2010 (3,427 hospitals included) Wage index also reflects Occupational Mix Survey for calendar 2010 submitted in 2011 FY 14 proposed national average hourly wage (adjusted for occupational mix) = $38.2094 (2.0% increase from FY 13 final of $37.4608) 49

50. Medicare Hospital Reimbursement Update FY 2014 proposed wage index Highest:Santa Cruz-Watsonville, CA1.7180 Lowest:Rural Alabama0.7123 50

51. FY 2014 Proposed Wage Index – West Virginia 51

52. Medicare Hospital Reimbursement Update Occupational Mix Survey –FY 14 wage index adjusted by Occ Mix Surveys submitted in 2011 91.7% response rate – CMS continues to threaten to punish providers that do not comply Largest impacts on wage index from Occ Mix Survey: –St. Cloud, MN – 6.5% increase –Olympia, WA – 5.3% decrease –Next survey will be based on calendar 2013, due 7/1/14, and applied to FY 16-18 wage index 52

53. Medicare Hospital Reimbursement Update Delay in CBSA Refinement –Office of Management and Budget (OMB) released CBSA refinements on February 28, 2013 Updated to reflect 2010 Census Significant changes –New CBSAs added »Example – Beckley, WV (Fayette and Raleigh counties) –Some CBSAs merged –Counties switched or removed from several urban CBSAs (conversely may affect state rural wage index) »Example – Putnam County moving from Charleston to Huntington CBSA –Changes to certain Combined Statistic Areas – can be critical factor for urban geo reclass opportunities in certain circumstances 53

54. Medicare Hospital Reimbursement Update Delay in CBSA Refinement (cont.) CMS says it does not have time to implement for FY 14 – will delay until FY 15 –Providers negatively affected should consider submitting comment 54

55. Medicare Hospital Reimbursement Update Geographic Reclassifications –Hospitals already approved for reclass for FY 2014 must submit request by if they want to withdraw their reclass for FY 2014 within 45 days of proposed rule being published in Federal Register (FY 14 deadline June 24) –Hospitals wishing to submit an application to reclassify for FYs 15-17 must submit application by 9/3/13 55

56. Medicare Hospital Reimbursement Update Graduate Medical Education –IME: no significant changes –GME: proposal to include Labor & Delivery days in calculation Result will be decreased GME payments –Effective 10/1/13, teaching hospitals will no longer be able to count resident time spent at a CAH CAHs can still be reimbursed at 101% of allowable cost for their own residency program 56

57. Medicare Hospital Reimbursement Update Hospital Value Based Purchasing –Initial payment reduction increases to 1.25% in FY 14 –Measures and domain weights for FY 14 previously finalized by CMS –Proposes three new measures and removal of three other measures for FY 16 57

58. Medicare Hospital Reimbursement Update Hospital Readmissions Reduction Program –Maximum penalty increases to 2% in FY 14 –Proposal to expand the number of procedures exempt from being considered a readmission –Proposal to add two measures for FY 15: Patients admitted for exacerbation of chronic obstructive pulmonary disease (COPD) Patients admitted for elective total hip or total knee arthroplasty (THA/TKA) 58

59. Medicare Hospital Reimbursement Update Hospital Acquired Conditions –New in FY 15 –Hospitals in the lowest performing quartile will have 1% reduction in inpatient payments –Calculation based on two domains with equal weight First domain to include six Agency for Healthcare Research and Quality (AHRQ) patient safety indicators Second domain to include two Centers for Disease Control and Prevention (CDC) infection measures for FY 2015 –Additional calculation factors to include patient's age, gender, and comorbidities 59

60. Contact Information David Hall, CPA Senior Manager Dixon Hughes Goodman LLP 336-714-8147 david.hall@dhgllp.com 60